Democrats and Republicans don’t agree on much these days, but virtually everyone from both parties agrees that working-class voters in the Rust Belt are struggling. President Donald Trump won the support of the “forgotten men and women of our country” with promises to build a wall and renegotiate trade deals. Democrats have responded with their “Better Deal” agenda, a policy framework with less chance of becoming law than the New York Mets’ odds of winning the World Series.
The upshot is that both parties have a political imperative to aid the Rust Belt, but neither has the capacity to solve the biggest economic problem in the region: a decade long decline in startup activity. Startups are the sinew of the American economy, but the uncomfortable reality is that American businesses are dying. Despite all the money and attention focused on Silicon Valley, far more businesses have gone belly up than started up over the past decade. And where we do see business creation, it’s far too concentrated on the coasts.
Government alone cannot solve this problem, but it also can’t ignore it. The decline of startups in the heartland is real. It must be addressed, and it can be with a program modeled on Race to the Top – the education initiative that delivered the best return on investment of any Obama-era program. The idea would be to create a modest federal grant program incentivizing state lawmakers to develop a more startup-friendly business environment. Such a program would be a political victory for Democrats and Republicans, and more important, it would deliver real economic benefits to the Rust Belt.
To understand the severity of the problem, consider this: Last year, 75 percent of venture capital went to just four places—San Francisco, New York, Boston and Los Angeles. Large legacy businesses like Ford, General Electric and Boeing are vital to sustaining our economy, but at this point, they contribute relatively little to economic growth. By contrast, an often cited study from the Kauffman Foundation revealed that new businesses—startups—account for nearly all net job growth in America. The clear implication is that the future of American prosperity rests with entrepreneurs, specifically, the ones willing to start and stay in the Rust Belt.
So how do we achieve that? Congress should start by looking at Race to the Top. The goal for Race to the Top was simple – incentivize states to pass needed reforms to their school systems by offering federal prize money for whoever was the boldest and the brightest. It focused on four criteria: improving testing, developing teachers, upgrading data and turning around low-performing schools. To qualify, it wasn’t enough to submit a plan. Each state that sought the federal grant had to implement their proposed program. That took legislation and a willingness to overcome entrenched interests that had fought reform for decades.
The process was transparent and nonpolitical. It didn’t matter whether the state seeking the grant was red or blue, every submission was judged on its merits—a testament to Arne Duncan, who was secretary of education at the time. Winners were determined by an independent, nonpolitical board of experts that evaluated each application using a scoring rubric that was well-defined and publicly available. It resulted in fierce but productive competition among states that exceeded all expectations: For what turned out to be a rounding error in the federal budget, the Department of Education enticed 50 states to pass meaningful reforms including the creation of charter schools and paying teachers more for better performance.
The government can and should design a similar program for helping the Rust Belt. Here’s how it would work: Congress would create a modest competitive grant—$5 billion—to encourage state and local governments to build a friendlier environment for startups. To qualify for the grant, states and cities would enact reforms on criteria like developing a pipeline for local technology talent, eliminating regulations that protect existing monopolies or impede innovation, and investing in next generation technology infrastructure. All the money would be sent to the states: no new federal bureaucracy or permanent entitlement of any kind would be needed.
Some states would choose to roll back onerous regulations—like occupational licensing requirements and worker noncompete clauses that have nothing to do with consumer safety and everything to do with the desire of entrenched interests to limit competition. Other states would focus on doubling down where they have a comparative advantage–like ag-tech in Iowa, or autonomous vehicle software in Michigan. The idea recognizes that there is no uniform policy playbook for spurring entrepreneurship – what works in one state may fail in another. But giving states the resources, the flexibility and the political cover to experiment is the best hope we have for addressing the intractable problems contributing to our present stagnation.
Race to the Top worked in precisely the same way. The federal government articulated a bold, bipartisan vision – an end to failing schools – and let the states determine the best path for reaching it. Governors and state lawmakers were told to focus on their state’s needs, not conform to a single national standard. It resulted in entrepreneurial policymaking among the states who had license to get creative, overcome entrenched opposition, pass reforms and celebrate progress. The multiplier effect was enormous, dwarfing the comparatively minor investment to achieve goals that had been sought for decades.
Had the Obama administration simply commanded states to adopt the administration’s preferred policy changes, Race to the Top would have almost certainly failed. The alternative – a federal grant program that made a state’s eligibility contingent on the scope and scale of their education reforms – wasn’t an unfunded mandate, it didn’t infringe on the states’ prerogative to devise their own education policies and it encouraged policy innovation consistent with the belief that states are our nation’s “laboratories of democracy.”
Ultimately, what worked for education can work for economic renewal. Congress could adopt the same approach to create tens of thousands of jobs in the Rust Belt, and they could do it without spending a lot of money, without requiring a large new government bureaucracy, even without the usual fighting, scandal and controversy.
At the end of the day, what most entrepreneurs want isn’t complicated: They want to be in a city that their employees like living in and they want to operate in a jurisdiction whose regulatory climate is not slanted in favor of entrenched interests. Many startups would be willing to set up shop in Indiana, Ohio or Pennsylvania if they knew the environment was hospitable, the culture welcoming and the playing field fair. By awarding grants only to states willing to pass laws that allow startups to compete, the federal government can help make that happen.